ON MONEY

Hope for economy may rest on 4 'levers'

September 14, 2008|By Gail MarksJarvis, Your Money columnist

You know the problem well.

The housing market's a mess. So banks and brokers that were involved in mortgages are a mess. As a result, consumers and businesses are having trouble borrowing money, and economies worldwide are slowing. Analysts each day debate whether they see signs that point toward a better day.

Individual investors can become whipsawed as optimistic analysts tell them to start buying stocks while others urge caution.

That's why I was intrigued by a simple list a new team at Standard & Poor's has put together.

They have analyzed hundreds of factors that are tangled together to influence the economy and housing, and they came up with a list of four "levers" that investors can examine for signs the tide might be turning in housing. The housing market is not the only problem pulling at the economy and the stock market now, but most analysts claim that it will take a recovery in housing to get the world on a stronger course.

Here's what Mike Thompson, managing director of S&P's new market credit and risk strategies group, said he thinks investors need to watch:

*The average U.S. home price stabilizes at $250,000.

Home prices have been falling sharply for more than a year. Thompson notes they dipped to an average of $246,000 early this year and recently climbed to $252,000. For investors to be comfortable that the housing market is stabilizing, he said, the average price will have to remain at roughly $250,000 for four to five months.

Home prices have fallen because there is a glut of houses on the market, and consumers have had difficulty obtaining low-cost mortgages.

Some analysts focus on inventory numbers. Others focus on mortgage rates, which have been surprisingly high given Federal Reserve interest rate cuts -- at roughly 6 percent on a 30-year mortgage, versus the 5.5 percent that analysts say would make the financial system healthier. But Thompson said he simply focuses on the outcome -- prices declining no further and stabilizing around $250,000.

There's more to the $250,000 number than simply avoiding unwelcome gyrations in home prices, he said. Many of the mortgage-related bonds held by financial institutions are valued based on assumptions. And one assumption is that the average home price will be $250,000, Thompson said.

If prices fall further, there is a lot at stake. Financial institutions, which have already taken write-downs of about $500 billion, will have to mark down the prices of the mortgage-related bonds even further -- putting more financial stress on banks and brokers. As a result, banks could be even more unwilling, or unable, to lend money, and the housing crisis and credit crisis could become worse.

*Sales of homes total 5.5 million on a seasonally adjusted annual basis.

Thompson said monthly National Association of Realtors figures point to only 5 million home sales on an annualized basis. To clear out the glut of homes on the market, he said, that must rise to 5.5 million annually.

While some analysts track mortgage interest rates and the availability of loans, Thompson is comfortable that simply examining the sales numbers indicates whether people are obtaining the financing they need to move enough homes out of the market.

If the bailout of Freddie Mac and Fannie Mae does bring mortgage interest rates down, and also makes more loans available to home buyers, he said the sales should jump to the 5.5 million necessary.

Currently, the jury is still out, and some market watchers such as Richard Field, of Boston-based TYI LLC, claim that the housing market cannot recover until Wall Street again starts packaging mortgages into bonds, and reports to investors daily how homeowners are doing with their mortgage payments.

Only better reporting, he said, will restore confidence.

*Comparing Libor and the federal funds rate.

Think of this like watching a sad person. If you want to know if a person is sad, you might look for tears in their eyes. If you want to know if the banking system is in sad shape, you might look at this comparison of rates.

Libor, the London interbank offered rate, is the rate large financial institutions charge each other when they lend money. The fed funds rate is similar, but it's the rate the Federal Reserve sets for banks.

Typically, the two rates are close, with Libor only about 0.25 percentage points higher. But recently they have been farther apart, about 0.86 points, Thompson said. That indicates banks are worried that other banks won't be able to pay back loans; he'd like to see it fall to 0.50 percent.

The higher rates and the reluctance to lend money indicate a credit crunch, and it has to ease in order for people to obtain the loans they need and the housing market to improve, Thompson said.

*Oil at $100.

This indicator is the one Thompson feels best about, because it looks like oil might remain near this level, or even lower, for a while.

He figures that with oil cheaper than it was recently at more than $147 a barrel, the average American might have $80 more available to pay mortgages each month.

"That can make the difference between having credit problems or not having credit problems, or paying the mortgage or not paying the mortgage," he said.

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Gail MarksJarvis is a Your Money columnist. Contact her at gmarksjarvis@tribune.com.